Yahoo Finance Here's Why Ross Stores (ROST) is Marching Ahead of Its Industry
Ross Stores ROST has been gaining from positive customer response for its improved merchandise and strong value offerings. Also, reduced freight expenses and store-expansion efforts act as upsides.
This led to robust fourth-quarter fiscal 2022 results, where the top and bottom lines beat the Zacks Consensus Estimate and our estimate.
Earnings also improved 26% from $1.04 reported in the fourth quarter of fiscal 2021. Also, the operating margin of 10.7% expanded 90 bps from 9.8% in fourth-quarter fiscal 2021. The merchandise margin increased 15 bps in the quarter, owing to lower ocean freight, which was more than offset by higher markdowns.
Moving on, the company remains on track with its store expansion plans, which are focused on continually increasing penetration in existing, as well as new markets. In first-quarter 2023, the company expects to open 19 stores, comprising 11 Ross and eight dd's DISCOUNTS stores. In fiscal 2023, it expects to open 100 stores, including 75 Ross and 25 dd’s DISCOUNTS. These openings do not include the plans to close 10 existing stores in fiscal 2023.
Driven by these factors, management issued its guidance for fiscal 2023 and the first quarter which appears encouraging. For fiscal 2023, it expects comps to be relatively flat, whereas it posted a 4% decline in fiscal 2022. ROST envisions sales growth of 2-5% for the 53 weeks ending Feb 3, 2024, in sync with our estimate of 3.6%. Based on the sales view, the company estimates the operating margin for fiscal 2023 to be 10.3-10.7%.
The operating margin view incorporates the effects of the resetting of the baseline incentive compensation, higher wages, lower freight costs and the deleveraging effects of flat comps. Further, the operating margin is expected to benefit from the 53rd week to the tune of 20 bps. The company anticipates earnings per share of $4.65-$4.95 for the 53 weeks ending Feb 3, 2024, whereas it posted $4.38 in fiscal 2022. This view is in line with our estimate of $4.8. The extra 53rd week is expected to boost fiscal 2023 earnings per share by 15 cents.
For first-quarter fiscal 2023, sales are expected to increase 1-4% year over year. Earnings per share are envisioned between 99 cents and $1.05 for the fiscal first quarter, in sync with our estimate of $1.03. The company reported earnings of 97 cents per share in the year-ago quarter.
Consequently, shares of this Zacks Rank #3 (Hold) company have gained 11.3% in the past year against the industry’s 9.5% decline.
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That said, not all is good for ROST. Continued weakness in the dd’s DISCOUNTS performance, stemming from escalating inflationary pressures and increased promotions, remains concerning. Its top line dropped 3.9% year over year in fourth-quarter fiscal 2022. Although comps improved 1%, the metric came below the year-ago quarter’s growth of 9% due to flat traffic trends. The comp performance is likely to reflect the continued impacts of elevated inflation on its low- to moderate-income customers.
Also, rising costs due to higher distribution expenses act as a deterrent. The cost of goods sold (COGS) of $3,926.2 million increased 4% year over year. As a percentage of sales, COGS was 75.3%, marking a year-over-year increase of 15 basis points (bps). Distribution costs rose 90 bps, owing to the unfavorable timing of pack-away-related expenses and deleverage from its new Houston distribution center.
Conclusion
Although the above-mentioned inflationary pressures are concerning for the near term, we believe that ROST will sustain momentum on the back of strong value offerings, store-expansion efforts and reduced freight expenses. A VGM Score of A and long-term earnings growth rate of 10.5% raise optimism.
Stocks to Consider
Some better-ranked stocks are Urban Outfitters URBN, DICK’S Sporting Goods DKS and American Eagle Outfitters AEO.
Urban Outfitters, a leading lifestyle product and services company, currently carries a Zacks Rank #2 (Buy). Its expected EPS growth rate for three to five years is 18%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Urban Outfitters’ current fiscal-year revenues suggests growth of 5% from the year-ago reported figure.
DICK’S Sporting, which operates as a major omni-channel sporting goods retailer, offering athletic shoes, apparel, accessories and a broad selection of outdoor and athletic equipment, carries a Zacks Rank of 2 at present. Its expected EPS growth rate for three to five years is 5.4%.
The Zacks Consensus Estimate for DICK’S Sporting’s current fiscal-year revenues and EPS suggests growth of 2.2% and 10%, respectively, from the year-ago reported figures. DKS has a trailing four-quarter earnings surprise of 10%, on average.
American Eagle Outfitters, a retailer of casual apparel, accessories and footwear, currently carries a Zacks Rank of 2. AEO delivered an earnings surprise of 82.6% in the last reported quarter.
The Zacks Consensus Estimate for American Eagle Outfitters’ current fiscal-year sales and EPS suggests growth of 1.3% and 58.9%, respectively, from the year-ago reported figures.
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DICK'S Sporting Goods, Inc. (DKS) : Free Stock Analysis Report
